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MINNESOTA’S PROGRESS
AGAINST REGRESSIVITY
MINNESOTA’S PROGRESS AGAINST REGRESSIVITY
Published April 2015 by Growth & Justice
Written by:
Jeff Van Wychen, Policy Fellow
Edited by:
Dane Smith, President
Jennifer Weddell, Director of Finance, Operations & Publications
Designed by:
Mark Tundel, Communications Manager
Growth & Justice is a nonprofit research and advocacy organization that develops
innovative public policy proposals based on independent research and civic
engagement. We believe when Minnesota makes smart investments in practical
solutions it leads to broader prosperity for all.
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EXECUTIVE SUMMARY
TAX REGRESSIVITY AND WHY IT’S A PROBLEM
DATA USED IN THIS REPORT
THE INCIDENCE OF FEDERAL TAXES
MEASURING TAX REGRESSIVITY USING THE SUITS INDEX
THE FEDERAL TAX OFFSET
STATE AND LOCAL TAX REGRESSIVITY IN THE 50 STATES
CHANGES IN 50-STATE TAX REGRESSIVITY OVER THE LAST TWO YEARS
STATE & LOCAL EFFECTIVE TAX RATES IN MINNESOTA
TAX REGRESSIVITY AND ECONOMIC PERFORMANCE
CONCLUSION: PROGRESS ACHIEVED, WORK YET TO BE DONE
APPENDIX: STATE & LOCAL SUITS INDICES FOR THE 50 STATES
State and local taxes in the vast majority of states—including Minnesota—are regressive, meaning
that low and middle income households pay a larger percentage of their income in state and
local taxes than do high income households. Based on data from the recently released Minnesota
Tax Incidence Study (MTIS) from the Minnesota Department of Revenue, in 2012 middle income
Minnesotans were paying 25 percent more in state and local taxes per dollar of income than were
the top one percent.
The good news is that over the last two years Minnesota has made more progress than any other
state in reducing tax regressivity. Credit for this goes primarily to the powerfully progressive tax
acts passed during the 2013 and 2014 legislative sessions.
There are at least three reasons why policymakers should be concerned about tax regressivity and
seek to reduce it.
» » REVENUE ADEQUACY. Some public resistance to taxation is inevitable and even helpful.
However, it is imprudent to enflame this resistance through a regressive tax system. State
and local governments will be hard pressed to generate sufficient revenue to adequately
fund public services and infrastructure if they are relying disproportionately on tax
dollars derived from low and moderate income families, whose budgets are already
stretched due to decades of growing income inequality and declining real wages.
» » ECONOMIC NECESSITY. These same trends—growing income inequality and declining wages—
have eroded the purchasing power of lower and moderate income households, thereby
undermining the consumer purchasing power which is the backbone of the state and
national economies and contributing to severe recessions and anemic recoveries. Tax
regressivity accelerates this pernicious pattern by further eroding the purchasing power
of moderate income families.
» » TAX FAIRNESS. State and local government expenditures help to provide safe neighborhoods,
adequate transportation, and a legal system that protects property rights and enforces
contracts. Insofar as citizens benefit from these expenditures in proportion to their
income, they should pay taxes in proportion to their income. A regressive state and local
tax system undermines this basic notion of fairness by disproportionately taxing those
with the least ability to pay.
To examine tax regressivity in Minnesota relative to other states, this report relies on data from
Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, published by the Institute on
Taxation & Economic Policy. While the MTIS is an excellent source of information on state and local
tax regressivity in Minnesota, it does not include information for other states (with the exception of
a subsection of the MTIS that is based on data from the Who Pays report).
The Who Pays report is unique in that it provides a breakdown of the major state and local taxes
paid in all fifty states by income group. By comparing data from the 2013 and 2015 editions of the
Who Pays report, it is possible to rank states based on the degree of state and local tax regressivity
and determine the extent to which regressivity in each of the states has changed over the last two
years. The degree of tax regressivity in each state is measured by the Suits index; a Suits index of
-1.0 denotes a tax system that is completely regressive, while a Suits index of +1.0 denotes a tax
system that is completely progressive (i.e., taxes are paid entirely by the highest income household).
2
Only three states—California, Delaware, and Oregon—have a positive Suits index, denoting a
state and local tax system that is not regressive (i.e., progressive). The moderate degree of tax
progressivity in these states is attributable to the fact that all three rely heavily on a progressive
income tax, which is sufficient to offset more regressive sales and property taxes. Six states—
GROWTH & JUSTICE
Wyoming, Florida, Washington, South Dakota, Nevada, and Texas—have Suits indices below -0.2,
which denotes extreme tax regressivity. The defining characteristic of these states is the absence of
an individual income tax and heavy reliance on regressive sales, excise, and property taxes.
Over the last two years, the state and local tax system in four out of five states became more
regressive as measured by the Suits index. However, Minnesota has successfully bucked the trend
toward greater tax regressivity. From 2013 to 2015, the Suits index in Minnesota increased more
than in any other state in the nation.1 Translation: over the last two years, Minnesota led the nation
in terms of reducing tax regressivity.
CHANGE IN SUITS INDEX BY STATE FROM 2013 TO 2015 WITHOUT ADJUSTING FOR FEDERAL TAX OFFSET
0.03
0.02
0.01
0.00
-0.01
-0.02
-0.03
-0.04
-0.05
-0.06
-0.07
based on data from the 2013 and 2015 “Who Pays” reports
While the Suits index for the state and local tax systems in all fifty states fell by 0.012, the Suits index
in Minnesota increased by 0.018.2 While the values of these changes do not appear large, Suits index
changes of this magnitude denote a significant change in tax regressivity. Over this two year period,
Minnesota improved from the 16th least regressive state in the nation to the seventh least regressive.
The cause of the significant reduction in tax regressivity in Minnesota was no doubt driven in large
part by tax changes enacted during the 2013 and 2014 legislative sessions. The most significant of
these changes were:
• A higher income tax rate for the wealthiest households, which had the effect of increasing
dependence on the progressive income tax and making the income tax more progressive.
(The only state that had a regressivity reduction comparable to Minnesota—Delaware—
also increased its income tax rate on the highest income households.)
• Increased utilization of the homeowners and renters property tax refunds, which had the
effect of reducing dependence on regressive property tax and making the property tax less
regressive.
1 This conclusion is based on a comparison of data from the 2013 and 2015 Who Pays reports. The 2013 Who Pays is based on 2010 income levels
and tax laws in effect as of January 2013. The 2015 Who Pays is based on 2012 income levels and tax laws in effect as of December 31, 2014.
2 These Suits changes are based on data which excludes the impact of the federal tax offset. (See page 9 of the report for a description of the federal
tax offset.) Including the effects of the federal tax offset, the fifty state Suits index fell by 0.009, while Minnesota’s Suits index increased by 0.022—
once again the largest increase among all fifty states.
MINNESOTA MAKES PROGRESS
3
The progressivity resulting from these changes was sufficient to overcome increased income
concentration that was pushing Minnesota’s tax system toward greater regressivity.
Not only did the 2013 and 2014 tax acts produce the most significant reduction in tax regressivity
in the nation, but they also generated significant new resources to partially restore a decade of
funding cuts to critical public investments while simultaneously reducing taxes paid by most
Minnesota households, as demonstrated by two separate tax incidence analyses prepared by the
Minnesota Department of Revenue in 2013 and 2014.
Despite the concerns of naysayers, the reduction in tax regressivity resulting from the 2013 and
2014 tax acts does not appear to have damaged Minnesota’s economy, as the state continues to
outperform the national average based on most key indicators. Furthermore, a correlation between
these indicators and the degree of tax regressivity as measured by the Suits index for 44 states
(excluding oil and gas producing states that are economic outliers) shows that lower levels of
regressivity are associated with above average rates of personal income and GDP growth over the
last five years. In short, the preliminary indication is that reduced regressivity is correlated with
higher—not lower—levels of economic growth.
While Minnesota has made notable progress in reducing tax regressivity over the last two years,
the state and local tax system remains significantly regressive. Based on MTIS data for 2012—prior
to passage of the 2013 and 2014 tax acts—the average middle income household (defined here as
the middle twenty percent of all households by income) in Minnesota was paying 12.2 cents of each
dollar of income in state and local taxes, while the top one percent were paying just 9.8 percent. In
other words, state and local taxes per dollar of income were 25 percent higher for middle income
families than for the top one percent.
Based on MTIS projections for 2017—
after passage of the 2013 and 2014
tax acts—state and local taxes per
dollar of income will fall modestly for
middle income households and increase
significantly for the top one percent
relative to 2012, leading to a significant
reduction in the tax disparity between
these two income groups. Nonetheless,
despite a significant reduction in tax
regressivity, middle income households
will still be paying 13 percent more in
state and local taxes per dollar of income
than the top one percent.
STATE & LOCAL TAX PER DOLLAR OF INCOME 2012 VS. 2017
Furthermore, threats to fair taxation
loom on the horizon. Bills introduced
during the 2015 legislative session
would increase tax regressivity by
dramatically reducing the progressive
2015 MTIS
estate tax, providing social security
income tax breaks that would primarily benefit high income households, and cutting the powerfully
progressive renters property tax refund. Continued vigilance is needed to guard against creeping
tax regressivity and to protect the gains made during the 2013 and 2014 legislative sessions.
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The principal argument in favor of reducing tax regressivity is one of common sense. If a family with
an income of $50,000 or less can pay 12 percent of their income in state and local taxes, families
with incomes of $500,000 or more can be expected to do the same. This is not socialism or class
warfare, but simple tax fairness. Protection of past progress and pursuit of additional reduction in
tax regressivity should continue to be among the goals of state policymakers.
GROWTH & JUSTICE
50 STATE TAX INCIDENCE ANALYSIS
TAX REGRESSIVITY AND WHY IT’S A PROBLEM
A regressive tax system is one in which low- and moderate-income households pay a higher
percentage of their income in taxes than do high-income households. The level of taxes borne by a
household is typically measured in terms of
A REGRESSIVE TAX SYSTEM
the “effective tax rate” (ETR). For example, a
household with a $50,000 income that pays
0.20
$5,000 in state and local taxes would have a
state and local ETR of 10 percent ($5,000 ÷
$50,000 = 10%). In a regressive tax system, 0.15
ETRs tend to decline as household income
rises, so that the highest income households
0.10
have the lowest rates.
There are several reasons why policymakers
should seek to reduce the degree of tax
0.05
regressivity. The first and most obvious of
these is simple tax fairness. Households
0.00
benefit from many public services in
proportion to their income. For example, the
owner of a business benefits from a well-educated workforce that public investments in education
help to provide. In addition, businesses benefit from public expenditures on roads and bridges in
order to move raw materials and finished products and a legal system that enforces contracts and
protects property rights. In general, high income households benefit from the social stability that
public expenditures make possible and thus it is only fair that they pay for these investments in
proportion to their income.
A second rationale for reducing tax regressivity is revenue adequacy. In recent decades, declining
real per household income1 has eroded, pinching many low- and moderate-income families. State
and local governments will have a difficult time generating sufficient revenue to adequately fund
public services and infrastructure if they are relying disproportionately on tax dollars from lowand moderate-income families who have precious few dollars to spare. While a degree of public
resistance to taxes is inevitable, one way to mitigate this resistance and generate sufficient revenue
to support state and local investments in education, infrastructure, and other areas is through
a fairer, less regressive system that taxes all households at a similar (or at least less disparate)
effective rate.
A final rationale for reducing tax regressivity is economic necessity. Low- and moderate-income
families tend to spend a larger share of each dollar of income than do high income households;
the purchasing power of these households—which comprise the overwhelming majority of
consumers—is the backbone of the state and national economies. In recent decades, rising
income inequality has eroded the purchasing power of these families, contributing to more severe
recessions and more anemic recoveries. While a reduction in tax regressivity will not solve the
problem of rising income inequality, it will enhance middle class purchasing power by keeping
more dollars in the pockets of low- and moderate-income consumers, thereby promoting a stronger,
more robust economy.
1 For more on this, see a 2013 Growth & Justice report, Widening Economic Inequality in Minnesota: Causes, Effects, and a Proposal for Estimating Its
Impact in Policymaking found online at: http://growthandjustice.org/publication/EconomicInequality.pdf
GROWTH & JUSTICE
5
MINNESOTA’S PROGRESS AGAINST REGRESSIVITY
DATA USED IN THIS REPORT
There are many reports that examine tax regressivity; most notable among these is the Minnesota
Tax Incidence Study2 (MTIS), published biennially by the Minnesota Department of Revenue. This
report is extensive in that it is based on a large cross-section of Minnesota households and includes
information on nearly all state and local taxes. The most recent edition of the MTIS was published in
March 2015 and is based on 2012 income and tax information with projections for 2017.
However, the MTIS focuses on state and local taxes in Minnesota. We must rely on other sources to
conduct a comparative analysis of the degree of state and local tax regressivity in Minnesota relative
to other states. This report uses data from the fifth edition of Who Pays? A Distributional Analysis
of the Tax Systems in All 50 States3 published in January 2015 by the Institute on Taxation and
Economic Policy and based on 2012 income levels and incorporating state and local tax changes
enacted through December 31, 2014. The Who Pays report is an ideal source for an interstate tax
incidence analysis because it provides state and local ETRs by income group that are comparable
across all fifty states.
There are significant differences between the Who Pays report and the MTIS which should be noted:
• Senior households are excluded from the Who Pays report, while the MTIS is based on a
random sample of all Minnesota households, including seniors.
• While both reports are based on 2012 income data, the MTIS is based on 2012 tax laws,
while Who Pays uses a microsimulation model4 to project the impact of tax changes
enacted through the end of 2014. This is critical, since major tax changes were enacted in
Minnesota during the 2013 and 2014 legislative sessions. The MTIS’s 2017 tax incidence
analysis does incorporate tax changes enacted in 2013 and 2014 based on projected 2017
income levels.
• While the MTIS examines nearly every state and local tax in Minnesota, Who Pays is
restricted to a smaller set of major taxes (specifically, property, sales and excise, and
individual and corporate income taxes) which comprise the bulk of state and local tax
revenue in each of the fifty states.
• Assumptions regarding business tax incidence between the two reports are different,
although the results for Minnesota are similar.
• The MTIS presents data based on ten equally-sized deciles, ranging from the lowest
income (or first) decile to the highest income (or tenth) decile, with the tenth decile
further broken down into the top five percent and the top one percent. (The MTIS also
reports data for groups comprised of ten equal shares of state income, referred to as
“income deciles.”) The Who Pays report presents data based on five equally sized quintiles,
ranging from the lowest income (or first) quintile to the highest income (or fifth) quintile,
with the fifth quintile broken down into the “next 15%” (i.e., the bottom three-fourths of
the top quintile), the “next 4%,” and the “top 1%.”
2 The most recent version of the MTIS can be found at: http://www.revenue.state.mn.us/research_stats/research_reports/2015/2015_tax_
incidence_study_links.pdf
3 This report can be found at: http://www.itep.org/pdf/whopaysreport.pdf
4 A description of the ITEP microsimulation model can be found at: http://ctj.org/ITEP/about/itep_tax_model_simple.php
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GROWTH & JUSTICE
50 STATE TAX INCIDENCE ANALYSIS
These differences help to explain some of the differences between the two reports in terms of
findings for Minnesota. For example, Minnesota ETRs reported in the MTIS tend to be higher
relative to those reported in Who Pays. This is no doubt largely attributable to the fact that the MTIS
includes a variety of minor taxes that are not included in Who Pays.
In addition, the ETR for Minnesota’s first (lowest income) decile from the MTIS is much higher than
the ETR for the first quintile ETR reported in Who Pays. This is likely due to a combination of the
following factors:
• Some of the minor taxes excluded from Who Pays but included in the MTIS are highly
regressive, falling most heavily on low-income households.
• Low-income households are more heavily concentrated in the first decile than in the first
quintile, since the first decile consists of the lowest ten percent of households by income,
while the first quintile consists of the lowest 20 percent. The heavier concentration of
low-income households in the first decile no doubt contributes to higher ETRs relative to
the first quintile.5
• The first decile in the MTIS includes low-income seniors who are living off savings and
thus report low annual income, thereby inflating their ETR. As noted above, Who Pays
excludes senior households.
• For various reasons described in the 2015 MTIS (including the understatement of income
in the first decile and the inclusion in the first decile of households with negative income
due to business or capital losses), “the effective tax rate for the first decile [reported in the
MTIS] is overstated…”6
Despite these differences, Who Pays “uses a methodology that is relatively close to what is used in
[the MTIS].”7
THE INCIDENCE OF FEDERAL TAXES
In aggregate, federal taxes are progressive,8 meaning that federal taxes per dollar of income tend
to be higher for high income households than for low income households. This is largely due to the
federal income tax, which is sufficiently progressive to offset other regressive features of the federal
tax code, such as payroll taxes and various deductions and subtractions to the federal income tax
that disproportionately benefit high income households. Including federal taxes in this analysis
would undoubtedly reduce the degree of observed tax regressivity. Nonetheless, federal taxes are
excluded from this analysis for various technical and philosophical reasons.
Among the technical reasons for not including the incidence of federal taxes in this analysis is that it
would require redefining income within each income group in all fifty states. This is because federal
payroll taxes for Social Security and Medicare are ultimately shifted onto workers; even the employer
share of these taxes are presumed to be borne by workers in the form of reduced compensation.
Thus, taking into account the impact of federal payroll taxes would require increasing income levels
in each group by the employer share of the tax, since even the employer share of the tax is effectively
paid out of employee income. An undertaking of this magnitude is beyond the scope of this research.9
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6
7
8
9
For example, based exclusively on MTIS data for 2017, ETRs for the lowest income group fall by 37 percent if we define “lowest income” as the
bottom quintile instead of the bottom decile.
2015 MTIS, p. 17.
2015 MTIS, p. 72.
The overall progressivity of federal taxes is described in a 2008 policy briefing prepared by the Tax Policy Center, found at: http://www.
taxpolicycenter.org/briefing-book/background/distribution/progressive-taxes.cfm
In fact, no research conducted anywhere to date has undertaken such an adjustment to income for each income group in all fifty states.
GROWTH & JUSTICE
7
MINNESOTA’S PROGRESS AGAINST REGRESSIVITY
Even including federal taxes in an incidence study would not give a complete picture of the extent to
which public services are paid for by low versus high income households because it would not take
into account:
• The extent to which state and local taxes in one state are shifted to taxpayers in other states.
For example, state taxes on commodities such as oil and gas are effectively shifted out
of state in the form of higher commodity prices. State and local taxes that are borne by
non-residents would still be overlooked even if federal taxes were included. Who Pays, the
MTIS, and this report examine only the incidence of state and local taxes upon taxpayers
within the state imposing them—not the incidence on taxpayers residing outside the
state.
• Fees and charges used to pay for public services. Neither Who Pays nor the MTIS10 take
into account fees and service charges used to pay for things such as park and trail usage,
renewal of drivers licenses, etc. Insofar as fees and charges are regressive, omitting them
from an incidence analysis understates the regressivity of the overall system used to pay
for public goods and services.
To date, no study has examined the degree of regressivity resulting from federal, state, and local
taxes and fees in all fifty states.
A strong case can be made for excluding federal taxes from a study of tax regressivity for use by
state policymakers, insofar as state policymakers have no control over tax decisions made at
the federal level. Regardless of the incidence of federal taxes, state and local governments will
be hard pressed to generate adequate revenue to fund state and local services if they are relying
disproportionately on taxes paid by low and moderate income families who have been squeezed by
increasing income inequality and decreasing real wages. A progressive federal tax system does not
justify—nor does it eliminate the problems caused by—a regressive state and local tax system.
For the reasons cited above, the research presented in this report will focus exclusively on the
regressivity of state and local taxes, excluding federal taxes. The only exception to this rule is the
consideration of the deductibility of state and local taxes from federally taxable income; for more
information on this, see “The Federal Tax Offset” on page 11.
MEASURING TAX REGRESSIVITY USING THE SUITS INDEX
The MTIS assesses the overall level of Minnesota state and local tax regressivity using a statistical
measure known as the Suits index. While the Who Pays report does not report Suits indices, it is
possible to calculate Suits indices for the state and local tax systems in all fifty states based on data
from the 2015 Who Pays report. Using the Suits indices for each state calculated based on Who Pays
data, it is possible to rank states in terms of the degree of state and local tax regressivity.
The value of the Suits index ranges from +1.0 to -1.0, with values above zero denoting a progressive
tax system (i.e., high income households tend to have higher ETRs than do low income households),
while values below zero denote a regressive system. A Suits index with a value of zero denotes
a proportional system in which ETRs across income levels are approximately equal (or, more
precisely, ETRs display no aggregate variation based on income).
10 Technically, the MTIS examines the incidence of tobacco and cigarette “fees,” but these “fees” actually resemble conventional taxes.
8
GROWTH & JUSTICE
50 STATE TAX INCIDENCE ANALYSIS
For a tax system to have a Suits index of +1.0, all of the taxes would have to be paid by the single
household with the highest income. For a system to have a Suits index of -1.0, all of the taxes would
have to be paid by households with zero income. Tax systems with a Suits index of +1.0 or -1.0
never occur in the real world. In practice, a Suits index of -0.2 denotes an extremely regressive tax
system. Even a Suits index of -0.02 denotes a degree of tax regressivity which, while relatively low,
is not negligible.11
The state and local Suits index for Minnesota based on the MTIS is lower (denoting greater
regressivity) than the Minnesota Suits index calculated using data from the Who Pays report. This is
due to the fact that:
• As noted above, the two reports draw from different data sources. Most notably, the MTIS
includes data for senior households and incorporates minor regressive taxes that are
omitted from the Who Pays report. These differences contribute to a lower Suits index for
Minnesota based on MTIS data relative to Who Pays data.
• Suits indices calculated using Who Pays data are based on seven income groups (i.e., the
bottom four quintiles and a fifth quintile divided into three parts), while the Suits indices
reported in the MTIS are based on ten income groups or upon the “full sample” in which
data for each individual household in the sample is incorporated into the Suits calculation
(i.e., no grouping of households). Suits indices calculated based on a larger number of
groups (or ideally the full sample) are more accurate than Suits indices calculated based
on a smaller number of groups.12
Because the Suits indices for Minnesota reported in the MTIS are based on a more comprehensive
array of taxes and a larger number of income groups (or the full sample), they are more accurate than
the Suits indices for Minnesota calculated using Who Pays data. However, the MTIS provides no insight
into how Minnesota compares to other states in terms of the degree of state and local tax regressivity
because it contains data for Minnesota only. (The only exception to this rule is in chapter 4, section E
of the MTIS which contains fifty state tax incidence information from the Who Pays report.)
The Who Pays report, on the other hand, contains data on the ETRs by income group that is
consistent for all 50 states. This data can be used to calculate a state and local Suits index for each
state and subsequently rank the states in terms of the degree of tax regressivity.
THE FEDERAL TAX OFFSET
Taxpayers can deduct what they pay in homestead property taxes, state income taxes, and motor
vehicle registration taxes from their federally taxable income. As a result, those who claim these
itemized deductions pay less federal income tax. Similarly, insofar as state and local business taxes
reduce business income, the federal tax liability is lowered. This “federal tax offset” primarily
benefits higher income households. Arguably, this federal tax offset should be taken into account
when measuring the net regressivity of state and local tax systems.
Who Pays reports ETRs by household both with and without the effects of the federal tax offset.
(The MTIS primarily examines ETRs without taking into account the federal offset, although it does
include federal offset effects in chapter 4, section B.) Because the impact of the federal offset can
vary significantly from state to state, the following analysis will examine Suits indices both with and
without taking into account the impact of the federal tax offset.
11 A 2014 Minnesota 2020 article, Tax Fairness: How Minnesota Compares to Other States, discusses the interpretation of Suits indices and the degree
of tax regressivity associated with Suits indices of varying values. This article can be found at: http://www.mn2020.org/issues-that-matter/fiscalpolicy/tax-fairness-how-does-minnesota-compare-to-other-states
12 The regressivity of a regressive tax system (or the progressivity of a progressive tax system) is more likely to be understated when fewer groups are
used in the Suits calculation.
GROWTH & JUSTICE
9
MINNESOTA’S PROGRESS AGAINST REGRESSIVITY
STATE AND LOCAL TAX REGRESSIVITY IN THE 50 STATES
The Suits indices calculated using data from the 2015 Who Pays report demonstrates that the state
and local tax systems in the vast majority of states are regressive. Minnesota is no exception to this
rule, although the Gopher State numbers among the top ten least regressive states based on Suits
indices calculated using 50-state data from the most recent Who Pays report, based on 2012 income
levels and tax laws as of December 31, 2014.
TABLE 1: STATE & LOCAL SUITS INDICES FOR THE 50 STATES
Without Adjusting for Federal Offset Adjusting for Federal Offset
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
All U.S.
Based on 2015 Who Pays data
10
GROWTH & JUSTICE
Suits Index
-0.139
-0.127
-0.120
-0.095
0.046
-0.084
-0.084
0.028
-0.253
-0.072
-0.080
-0.021
-0.124
-0.102
-0.054
-0.101
-0.059
-0.122
-0.005
-0.030
-0.086
-0.078
-0.015
-0.102
-0.055
-0.014
-0.055
-0.222
-0.128
-0.005
-0.098
-0.015
-0.051
-0.144
-0.076
-0.123
0.015
-0.107
-0.042
-0.042
-0.230
-0.192
-0.202
-0.074
-0.017
-0.048
-0.236
-0.025
-0.043
-0.260
-0.069
Rank
42
40
36
30
1
28
27
2
49
22
26
10
39
34
18
32
21
37
4
12
29
25
7
33
20
6
19
46
41
5
31
8
17
43
24
38
3
35
13
14
47
44
45
23
9
16
48
11
15
50
Suits Index
-0.174
-0.152
-0.158
-0.130
0.004
-0.116
-0.136
-0.018
-0.290
-0.115
-0.111
-0.050
-0.160
-0.131
-0.089
-0.149
-0.093
-0.156
-0.037
-0.065
-0.126
-0.103
-0.048
-0.133
-0.093
-0.051
-0.091
-0.257
-0.163
-0.046
-0.125
-0.068
-0.093
-0.176
-0.110
-0.151
-0.024
-0.147
-0.080
-0.078
-0.250
-0.209
-0.221
-0.102
-0.046
-0.087
-0.257
-0.057
-0.077
-0.302
-0.110
Rank
42
37
39
30
1
27
33
2
49
26
25
8
40
31
17
35
20
38
4
11
29
23
7
32
21
9
18
48
41
5
28
12
19
43
24
36
3
34
15
14
46
44
45
22
6
16
47
10
13
50
50 STATE TAX INCIDENCE ANALYSIS
The first two columns in Table 1 list the state and local Suits indices of all fifty states excluding the
impact of the federal tax offset and the rank of each from least regressive (“1”) to most regressive
(“50”). The graph below lists all fifty states in order of their Suits indices, with states listed from
left to right from least to most regressive. The state and local Suits index for all 50 states combined
is -0.069 (the green bar in the graph), which denotes a fairly significant level of tax regressivity;
21 states have Suits indices above the 50 states Suits index (denoting below average regressivity),
while 29 states have indices below the 50 states index (denoting above average regressivity).
SUITS INDICES BY STATE - WITHOUT ADJUSTING FOR FEDERAL TAX OFFSET
0.05
BASED ON 2012 INCOME DATA AND TAX LAWS AS OF DEC. 31, 2014
0.00
-0.05
-0.10
-0.15
-0.20
-0.25
-0.30
Only three states (California, Delaware, and Oregon) have a positive Suits index, denoting a
state and local tax system that is not regressive (i.e., progressive). The moderate degree of tax
progressivity in these states is attributable to the fact that all three rely heavily on a progressive
income tax, which is sufficient to offset more regressive sales and property taxes.13
On the other end of the spectrum from the three progressive states are six extremely regressive
states, each with a state and local Suits index below -0.20. These six states—Wyoming, Florida,
Washington, South Dakota, Nevada, and Texas—each lack an individual income tax. These states
rely almost exclusively on regressive sales, excise, and property taxes (although one of these states,
Nevada, relies heavily on a corporate income tax), with the result being a highly regressive overall
state and local tax system.
Minnesota—with a Suits index of -0.015 (the orange bar in the above graph)—ekes ahead of New
York as the seventh least regressive state and local tax system in the nation.14 Among neighboring
states, Minnesota has by far the least regressive state and local tax system. Minnesota’s rank as the
seventh least regressive state in the nation is primarily due to (1) its relatively heavy reliance on
progressive income taxes and (2) the fact that income taxes in Minnesota are more progressive than
in most other states.
13 Based on Who Pays data, Oregon and Delaware rank 1st and 2nd respectively among the 50 states in the extent to which they rely on the individual
income tax. While California ranks a relatively modest 14th in terms of individual income tax dependence, the individual income tax in that state is
more than twice as progressive as state and local individual income taxes in other states.
14 New York also has a Suits index of -0.015 ignoring the impact of the federal offset, but falls behind Minnesota before rounding. Minnesota’s Suits
index is slightly greater than New York’s but both states round off to -0.015.
GROWTH & JUSTICE
11
MINNESOTA’S PROGRESS AGAINST REGRESSIVITY
Including the impact of the federal tax offset—which primarily benefits high income households—
has the effect of reducing the Suits index and increasing the degree of observed state and local tax
regressivity in all 50 states. The last two columns in Table 1 list the state and local Suits indices
for all fifty states including the impact of the federal tax offset. The graph below lists all fifty
states in order of their Suits indices after adjusting for the offset, with states listed from left (least
regressive) to right (most regressive). The aggregate Suits index of all 50 states is also shown.
SUITS INDICES BY STATE - ADJUSTING FOR FEDERAL TAX OFFSET
0.05
BASED ON 2012 INCOME DATA AND TAX LAWS AS OF DEC. 31, 2014
0.00
-0.05
-0.10
-0.15
-0.20
-0.25
-0.30
-0.35
The average Suits index for all fifty states after adjusting for the effects of the federal tax offset (the
green bar) is -0.110, compared to just -0.069 prior to adjusting for the offset; 24 states have Suits
indices above this fifty state average (denoting below average regressivity) while 26 states have
indices below the fifty state average (denoting above average regressivity).
While the observed degree of regressivity increases after adjusting for the federal tax offset, the
position of states relative to each other in terms of the degree of state and local tax regressivity
generally does not change much; the regressivity ranking of most states changes by only one
position or stays the same after adjusting for the effects of the offset. The three least regressive
states prior to adjusting for the offset (California, Delaware, and Oregon) remain the three least
regressive states after the offset, although only California remains truly progressive, with a Suits
index above zero (+0.004).
On the other end of the regressivity spectrum, the six most regressive states prior to adjusting for
the federal offset remain the six most regressive states after adjusting for the offset. Minnesota’s
Suits index after adjusting for the federal offset is -0.048 (the orange bar), compared to just
-0.015 prior to adjusting for the offset. However, Minnesota’s regressivity rank among states after
adjusting for the offset is the same as before adjusting for the offset (seventh).
Minnesota’s emergence among the top ten least regressive states in the nation is a relatively recent
development that is largely attributable to changes in tax law enacted over the last two years.
12
GROWTH & JUSTICE
50 STATE TAX INCIDENCE ANALYSIS
CHANGES IN 50-STATE TAX REGRESSIVITY OVER THE LAST TWO YEARS
While the state and local tax systems in the vast majority of states became more regressive over
the last two years, Minnesota’s tax system became significantly less regressive. These conclusions
are based on a comparison of Suits indices calculated from data in the 2013 edition of Who Pays,
which is based on 2010 income levels and tax laws as of January 2013, and the 2015 edition, which
as noted above, is based on 2012 income levels and tax laws as of December 31,2014. (An appendix
to this report features a table showing the state and local Suits index and regressivity ranking
based on data from the 2013 Who Pays report. The table in the preceding section shows similar
information based on the 2015 Who Pays report.)
The graph below shows the change in Suits indices from 2013 to 2015 (i.e., based on data from the
2013 and 2015 Who Pays reports) for all fifty states, with states listed from left to right from the
largest Suits index increase (i.e., the greatest reduction in tax regressivity) to the largest Suits index
reduction (i.e., the greatest increase in tax regressivity). The data in this graph is based on the Suits
index change prior to taking into account the federal tax offset.
CHANGE IN SUITS INDEX BY STATE FROM 2013 TO 2015 - WITHOUT ADJUSTING FOR FEDERAL TAX OFFSET
0.03
0.02
0.01
0.00
-0.01
-0.02
-0.03
-0.04
-0.05
-0.06
-0.07
BASED ON DATA FROM THE 2013 AND 2015 WHO PAYS REPORTS
Over the last two years, tax regressivity increased in the vast majority of states. Only ten states
had an increase in their state and local Suits index from 2013 to 2015, denoting a reduction in tax
regressivity. The largest reduction in tax regressivity occurred in Minnesota; Minnesota’s Suits
index increased by 0.018 from 2013 to 2015 (the orange bar). Tax regressivity increased in the
remaining forty states, as did the aggregate for all fifty states combined (the green bar). The graph
on the following page shows the change in Suits indices among the fifty states over the same two
year period, this time including the impact of the federal tax offset.
GROWTH & JUSTICE
13
MINNESOTA’S PROGRESS AGAINST REGRESSIVITY
CHANGE IN SUITS INDEX BY STATE FROM 2013 TO 2015 - ADJUSTING FOR FEDERAL TAX OFFSET
BASED ON DATA FROM THE 2013 AND 2015 WHO PAYS REPORTS
0.03
0.02
0.01
0.00
-0.01
-0.02
-0.03
-0.04
-0.05
-0.06
-0.07
The trend observed after taking into account the effects of the federal tax offset is roughly similar to
the trends observed without the offset. Only fifteen states—again led by Minnesota (the orange bar)—
showed a reduction in tax regressivity over the last two years. The remaining 35 states, as well as the
aggregate change for all fifty states combined (the green bar), showed an increase in tax regressivity.
The overall increase in tax regressivity among the fifty
states is almost certainly due in large part to growth in
income concentration at the top of the income spectrum.
The graph to the right shows the growth by income
group based on data from the 2013 and 2015 Who
Pays reports (corresponding to 2010 and 2012 income
levels) for all fifty states combined.
CHANGE IN AVERAGE INCOME FROM 2013 TO 2015
CORRESPONDING TO 2010 AND 2012 INCOME LEVELS
On a national basis, growth in average income among the
top one percent grew three times faster than among the
bottom 95 percent. A similar pattern was observed in
each of the fifty states, with the top one percent showing
the largest increase in income in every state except one.
Furthermore, Gini coefficients15 for each of the fifty
states increased over the last two years (denoting an
increase in income concentration at the top) based on
data from the 2013 and 2015 Who Pays reports.
Who Pays reports
The degree of tax regressivity tends to increase as the degree of income concentration increases.
This is due in large part to the fact that as the share of income accruing to the highest income
households increases, the share of income subject to the lowest state and local ETRs also increases,
since the highest income households have the lowest ETRs. The growth in nationwide state and
local tax regressivity is consistent with the trend of growing income concentration.
15 A description of the Gini coefficient can be found at: http://simple.wikipedia.org/wiki/Gini_coefficient
14
GROWTH & JUSTICE
50 STATE TAX INCIDENCE ANALYSIS
However, tax regressivity in Minnesota declined significantly over the last two years, despite
the fact that the level of income concentration at the top increased in Minnesota at a rate
commensurate with the rest of the nation. The decline in tax regressivity in Minnesota is no doubt
due largely to tax legislation passed during the 2013 and 2014 legislative sessions, specifically:
• The enactment of a higher income tax rate for the wealthiest two percent of Minnesota
households. More precisely, the 2013 tax act increased the income tax rate from 7.85
percent to 9.85 percent on the portion of taxable income above $250,000 for married joint
filers, $200,000 for heads of households, and $150,000 for single filers. This change made
Minnesota’s tax system less regressive by making Minnesota more dependent on revenue
generated from the progressive income tax and by simultaneously making Minnesota’s
state income tax more progressive.
• Expansion of property tax relief programs, most notably the homeowners and renters
property tax refunds. The largest single property tax relief measure was the expansion
of the homeowners refund (renamed the homestead credit refund),16 which increased
refunds for eligible households with incomes from $19,530 to $105,500. The property
tax relief provisions in the 2013 and 2014 tax acts reduced tax regressivity in Minnesota
by reducing dependence on regressive property taxes and by simultaneously making
the property tax itself less regressive through increased utilization of progressive refund
programs.
The fact that progressive changes in tax policy in Minnesota were more than sufficient to offset
the regressive impact of increased income concentration is not surprising. Previous research17
has demonstrated that changes in tax policy (more precisely, tax policy changes that modify the
extent to which a state depends on regressive versus progressive taxes) are a far more powerful
determinant of changes in tax regressivity than are changes in the degree of income concentration.
It is worth noting that the only state that came close to Minnesota in terms of reducing tax
regressivity from 2013 to 2015—Delaware—also implemented tax policy changes that increased
the income tax rate for the highest income households.
The powerfully progressive aspects of the 2013 and 2014 tax acts were not only sufficient to offset
the regressive impact of increased income concentration, but also the effects of regressive tax
changes—most notably, a large increase in regressive cigarette taxes18 and a large reduction in the
progressive estate tax.19
The 2015 Who Pays report includes some components of personal income that were excluded
from the 2013 Who Pays report, which may contribute to the change in personal income levels
and effective tax rates published in the last two reports. Nonetheless, the growth in income
concentration indicated by a comparison of data from the last two Who Pays reports is consistent
with trends observed from other sources.20 Furthermore, the significant reduction in tax
regressivity in Minnesota is consistent with trends reported in the 2015 MTIS.21 Thus, while the
measure of income has changed from the 2013 to 2015 Who Pays reports, the trends in income
growth and tax regressivity in Minnesota are confirmed by data from other sources.
16 The new homestead credit refund was described in a 2013 Minnesota 2020 article, which can found at: http://www.mn2020.org/issues-thatmatter/fiscal-policy/targeted-powerful-property-tax-relief
17 Specifically, a 2014 Minnesota 2020 report, which can be found at: http://www.mn2020.org/assets/uploads/article/MN_moves_ahead_web.pdf
18 Described more fully in a 2013 Minnesota 2020 article, which can be found at: http://www.mn2020.org/issues-that-matter/fiscal-policy/despiteregressivity-tobacco-tax-increase-was-good-policy
19 Described more fully in a 2014 Minnesota 2020 article, which can be found at: http://www.mn2020.org/issues-that-matter/fiscal-policy/newestate-tax-break-comes-with-high-cost-in-revenue-fairness
20 For example, based on data from the last two Minnesota Tax Incidence Studies, from 2010 to 2012 the average income among the top 1% grew 2.7
times faster than among the bottom 95 percent—a trend roughly similar to what is observed in Minnesota based on Who Pays data.
21 The 2015 MTIS shows a significant reduction in tax regressivity from 2012 (prior to the 2013 and 2014 tax acts) to projected 2017 (after the 2013
and 2014 tax acts).
GROWTH & JUSTICE
15
MINNESOTA’S PROGRESS AGAINST REGRESSIVITY
From 2013 to 2015, state and local tax regressivity in Minnesota declined more than in any other
state in the nation. Furthermore, Minnesota’s jump in the fifty state regressivity ranking—from
the 16th least regressive state22 based on 2013 Who Pays data to 7th least regressive based on 2015
data—represents the largest leap in the nation. These improvements can be largely attributed to
powerfully progressive tax changes enacted during the 2013 and 2014 sessions.
STATE & LOCAL EFFECTIVE TAX RATES IN MINNESOTA
As noted above, the 2015 MTIS provides the
most accurate and detailed information currently
available regarding Minnesota state and local
effective tax rates (ETRs) by income group. The
graph to the right shows Minnesota state and
local ETRs by decile based on data from the 2015
MTIS, with the top decile further broken down
into the “next 5%” (i.e., the bottom half of the
top decile), the “next 4%,” and the “top 1%.” In
order to reflect the impact of the 2013 and 2014
tax changes, the graph presents the projected
ETRs based on projected 2017 data. (The 2012
ETRs presented in the 2015 MTIS do not include
the impact of the 2013 and 2014 tax acts.) In
this graph, the ETR of the first decile (26.4%) is
omitted due to first tier data anomalies noted
previously (and described in more detail on page
17 of the 2015 MTIS).
PROJECTED 2017 EFFECTIVE TAX RATES
2015 MTIS
The table below shows the income ranges associated with each of these income groups.
Deciles
Income
Groups
1st
2nd
3rd
4th
5th
6th
7th
8th
9th
10th
10th Next 5%
Decile Next 4%
Detail Top 1%
Income Range
Average Income
Under $12,585
$12,585 to $20,449
$20,450 to $29,136
$29,137 to $39,054
$39,055 to $51,098
$51,099 to $66,362
$66.363 to $86,340
$86,341 to $113,860
$113,861 to $165,870
Over $165,870
$165,871 to $241,940
$241,941 to $595,346
Over $595,346
$7,491
$16,531
$24,637
$34,065
$44,886
$58,600
$75,791
$99,207
$136,276
$394,093
$197,409
$345,152
$1,571,524
22 From a 2014 Minnesota 2020 report, Minnesota had the 16th least regressive state and local tax system in the nation based on data from the 2013
Who Pays report.
16
GROWTH & JUSTICE
50 STATE TAX INCIDENCE ANALYSIS
Based on projected 2017 data, the lowest ETR for any decile is 10.7 percent, found within the tenth
(highest income) decile. While the third decile ETR is 10.9 percent, the ETRs of all other deciles
excluding the tenth are above 11 percent and most are near 12 percent or above. A more detailed
analysis of the tenth decile shows that the lowest ETRs are concentrated in the top half of the decile
(i.e., the top five percent, represented as the “next 4%” and “top 1%” in the graph), which has an
ETR of 10.5 percent. In short, the households with the highest incomes in Minnesota still enjoy the
lowest effective tax rates.
The regressivity of Minnesota’s tax system is further underscored by a comparison of state and
local taxes borne by moderate income versus high income households. The average ETR of the top
one percent is 10.5 percent, while the average ETR of middle-income households (defined here as
the 5th and 6th deciles combined) is 11.9 percent. In other words, households with incomes between
$39,000 and $66,000 are paying 13 percent more in state and local taxes per dollar of income than
are households in the top one percent with an average income of nearly $1.6 million. Minnesota’s
state and local tax system remains significantly regressive.
The regressivity of Minnesota’s state and local tax system is also demonstrated in the state’s
projected 2017 Suits index of -0.035. As noted above, state and local Suits indices for Minnesota
from the MTIS are more accurate than Suits indices calculated based on Who Pays data because the
MTIS includes a wider array of taxes and a broader sampling of Minnesota’s population (although
Who Pays remains the only source of data for making comparisons between Minnesota and other
states). The projected 2017 Suits index of -0.035—while greater than the Suits indices from
previous years—still denotes continuing and significant tax regressivity.
Based on a comparison of Minnesota’s 2012 and projected 2017 state and local ETRs, it is clear
that Minnesota has made progress in reducing tax regressivity. As noted in previous sections of this
report, Minnesota has also made progress relative to other states in reducing tax regressivity. Most
of the credit for this goes to the robustly progressive tax acts of 2013 and 2014.
Nonetheless, moderate income households continue to pay significantly higher state and local taxes
per dollar of income than do high income households. The degree of tax regressivity in Minnesota—
while diminished relative to the levels of the recent past and relative to other states—remains
significant. In the battle against tax regressivity, Minnesota policymakers cannot afford to rest on
their laurels.
TAX REGRESSIVITY AND ECONOMIC PERFORMANCE
The first section of this report argued that reduced tax regressivity contributes to improved
economic performance by putting more dollars in the pockets of low and moderate income
households. As these households tend to spend a larger portion of their income on goods and
services than do high income households, an increase in their purchasing power through reduced
tax regressivity provides more dollar-for-dollar stimulus than a similar reduction for high income
households resulting from increased tax regressivity.
The first section also argued that reduced tax regressivity can result in higher state and local
revenues and greater public investment because state and local governments are relying less
heavily on taxes generated from low and moderate income households that are struggling to
make ends meet; the higher level of public investment can in turn result in improved education,
transportation, and overall quality of life—assets that will make a state more attractive to
businesses and more likely to create well paying jobs.
GROWTH & JUSTICE
17
MINNESOTA’S PROGRESS AGAINST REGRESSIVITY
However, conservatives dispute these conclusions, arguing that a reduction in tax regressivity at the
state and local level will contribute to “tax flight” among high income households, as they relocate to
states where they are not taxed as heavily (i.e., states with higher tax regressivity). Insofar as these
high income households are “job creators,” a move toward a less regressive tax system can lead to a
loss of businesses and jobs within a state. Progressives in return dispute the extent to which tax flight
occurs at all, as well as the extent to which high income households are necessarily “job creators.”
Minnesota’s progress in reducing tax regressivity certainly does not seem to have hurt overall
economic performance, as the state’s unemployment rate is a full two percent below the national
average and personal income growth remains healthy. However, given that the 2013 tax act was
enacted less than two years ago and the 2014 act was enacted less than one year ago, not enough
time has passed to fully gauge the success of this legislation. Furthermore, one state does not a
pattern make.
However, it is possible to examine the impact of tax regressivity on economic performance by
comparing the degree of regressivity in each state to the level of economic performance. Specifically,
the following analysis correlates the Suits index of each state—with and without the federal tax
offset—to six widely used measures of economic performance:
• Annual personal income per capita (2013; source: U.S. Bureau of Economic Analysis)
• Growth in personal income per capita over the last five years (2008-2013; source: U.S.
BEA)
• Gross domestic product per capita (2013; source: U.S. BEA)
• Growth in GDP per capita over the last five years (2008-2013; source: U.S. BEA)
• Unemployment rate (December 2014; U.S. Bureau of Labor Statistics)
• Growth in non-farm employment over the last five years (December 2009-2014, U.S. BLS)
In each case, the most recently available data at the time this research was conducted was used.
When correlating the Suits indices with the level of economic performance as measured by the six
factors listed above, there were no statistically significant relationships.23 Based on this analysis,
there is no strong evidence that the degree of tax regressivity in a state has any impact on economic
performance.
However, these results could be influenced by the economic boom experienced within oil and
gas producing states during the period under examination. For example, the economic growth in
North Dakota over the last five years was driven by oil and gas production in that state and would
have occurred regardless of the degree of tax regressivity in North Dakota. Insofar as oil and gas
producing states are economic outliers, they could arguably be excluded from this analysis.
If we exclude the top tier of oil and gas producing states (states in which oil and gas extraction and
related support activities exceed ten percent of state GDP)— defined here as Alaska, Louisiana,
North Dakota, Oklahoma, Texas, and Wyoming—a somewhat different picture emerges. While there
is no statistically significant relationship between the degree of tax regressivity and (1) job growth
over the last five years and (2) the current unemployment rate, there is a statistically significant
relationship between the degree of tax regressivity and some of the GDP and personal income
measures:
23 A relationship is considered to be “statistically significant” if—based on commonly used statistical measures—we can be 95 percent confident that
the observed relationship is not the result of random chance.
18
GROWTH & JUSTICE
50 STATE TAX INCIDENCE ANALYSIS
• States with relatively less tax regressivity had stronger GDP growth based on the
correlation between the Suits index (with and without taking into account the federal tax
offset) and the five year growth in per capita GDP.
• States with relatively less tax regressivity had stronger personal income growth based on
the correlation between the Suits index (including the impact of the federal tax offset) and
the five year growth in per capita personal income.24
Among the 44 states included in this analysis, the degree of tax regressivity as measured by the
Suits index was sufficient to explain over 12 percent of the variation among states in per capita
GDP growth over the last five years (12.2 percent based on the Suits index excluding the impact of
the federal offset and 14.6 percent including the impact of the offset). Meanwhile, the degree of tax
regressivity as measured by the Suits index including the impact of the federal offset was sufficient
to explain 9.2 percent of the variation in per capita personal income growth. In each of these
instances, superior and statistically significant economic growth was associated with reduced tax
regressivity.
While reduced tax regressivity was not associated with higher (or lower) rates of unemployment
or job growth over the last five years, it was associated with stronger GDP and personal income
growth. Although correlation does not necessarily prove causation, the trends observed suggest at a
minimum that reduction in tax regressivity does not hurt a state’s economic performance and could
help to promote more robust income and GDP growth. While more extensive research is needed to
confirm the relationship between the degree of state tax regressivity and economic performance,
the results of this analysis indicate that the impact of reduced tax regressivity is primarily positive.
CONCLUSION: PROGRESS ACHIEVED, WORK YET TO BE DONE
Reduction in tax regressivity is not the only goal that policymakers should be concerned about,
but—given the need to increase the purchasing power of lower and middle income families
and generate sufficient revenue to provide adequate public services—it should be one of them.
Reduction in the degree of tax regressivity was a primary objective of the framers of the 2013 and
2014 tax acts. By all indications, they succeeded.
Based on information from the 2015 MTIS, the state and local Suits index for Minnesota fell from
-0.052 based on 2012 data (before the 2013 and 2014 tax changes) to -0.035 based on projected
2017 data (after the 2013 and 2014 changes), denoting a significant reduction in tax regressivity.
This trend is confirmed by the Suits indices cited above, which fell from -0.033 based on data from
the 2013 Who Pays report (before the 2013 and 2014 changes) to -0.015 based on data from the
2015 Who Pays report (after the 2013 and 2014 changes). Not only did Minnesota tax regressivity
decline in an absolute sense, but it also declined relative to other states. In fact, Minnesota led the
nation in reducing tax regressivity over the last two years, as the Gopher State improved from the
16th least regressive state in the nation to the seventh.
The principal mechanisms within the 2013 and 2014 tax acts which led to reduced state and local
tax regressivity was the enactment of a higher income tax rate for the wealthiest households, which
had the effect of increasing dependence on the progressive income tax and making the income tax
more progressive, and increased utilization of the homeowners and renters property tax refunds,
24 The correlation between the degree of tax regressivity and the Suits index excluding the impact of the federal tax offset fell barely short of
statistical significance based on 95 percent confidence criteria.
GROWTH & JUSTICE
19
MINNESOTA’S PROGRESS AGAINST REGRESSIVITY
which had the effect of reducing dependence on regressive property taxes and making the property
tax less regressive. The progressivity resulting from these changes was sufficient to overcome
increased income concentration and other factors that were pushing Minnesota’s tax system toward
greater regressivity.
Not only did the 2013 and 2014 tax acts produce the most significant reduction in tax regressivity
in the nation, but they also generated significant new resources to partially restore a decade of
funding cuts to critical public investments while simultaneously reducing taxes paid by most
Minnesota households. Based upon tax incidence analyses of the 2013 and 2014 tax acts prepared
by the Minnesota Department of Revenue,25 the collective changes resulting from this legislation
produced tax reductions within six of Minnesota’s ten deciles; if we exclude the impact of the
cigarette tax increase which affects fewer than one in six Minnesota adults, all income groups saw
tax reductions as a result of the 2013 and 2014 tax acts with the exception of the top five percent.
Despite the concerns of naysayers, the reduction in tax regressivity resulting from the 2013 and
2014 tax acts does not appear to have damaged Minnesota’s economy, as the state continues to
outperform the national average based on most key indicators. Furthermore, research cited above
shows that lower levels of tax regressivity are correlated with above average rates of personal
income and GDP growth over the last five years. In short, the preliminary indication is that reduced
regressivity is associated with higher—not lower—levels of economic growth.
However, despite the progress made over the last two years, Minnesota’s overall state and local
tax system remains regressive. The recently released 2015 MTIS shows that middle-income
households are paying 13 percent more per dollar of income in state and local taxes than are the
top one percent. Furthermore, bills introduced during the 2015 legislative session would erode the
progress made toward reducing tax regressivity by dramatically reducing the progressive estate tax,
providing social security income tax breaks that would primarily benefit high income households,
and cutting the powerfully progressive renters property tax refund. Continued vigilance is needed
to guard against creeping tax regressivity and to protect the gains made during the 2013 and 2014
legislative sessions.
The principal argument in favor of reducing tax regressivity is based on common sense. If a family
with an income of $50,000 or less can pay 12 percent of their income in state and local taxes,
families with incomes of $500,000 or more can be expected to do the same. This is not socialism
or class warfare, but simple tax fairness. Protection of past progress and pursuit of additional
reduction in tax regressivity should continue to be among the goals of state policymakers.
25 These incidence analyses were summarized in a 2014 Minnesota 2020 article, which can be found at: http://www.mn2020.org/issues-that-matter/
fiscal-policy/tax-rates-fall-for-most-minnesotans-thanks-to-progressive-tax-acts
20 GROWTH & JUSTICE
50 STATE TAX INCIDENCE ANALYSIS
APPENDIX: STATE & LOCAL SUITS INDICES FOR THE 50 STATES
Without Adjusting for Federal Offset
Suits Index
Rank
Alabama
-0.132
43
Alaska
-0.129
42
Arizona
-0.112
38
Arkansas
-0.081
30
California
0.050
1
Colorado
-0.077
28
Connecticut
-0.082
31
Delaware
0.011
3
Florida
-0.215
50
Georgia
-0.069
26
Hawaii
-0.065
25
Idaho
-0.009
7
Illinois
-0.118
40
Indiana
-0.094
35
Iowa
-0.054
20
Kansas
-0.076
27
Kentucky
-0.062
23
Louisiana
-0.115
39
Maine
-0.011
8
Maryland
-0.030
13
Massachusetts
-0.079
29
Michigan
-0.057
22
Minnesota
-0.033
16
Mississippi
-0.092
33
Missouri
-0.052
19
Montana
-0.007
5
Nebraska
-0.056
21
Nevada
-0.164
44
New Hampshire
-0.123
41
New Jersey
-0.008
6
New Mexico
-0.088
32
New York
-0.022
10
North Carolina
-0.024
12
North Dakota
-0.102
37
Ohio
-0.050
18
Oklahoma
-0.099
36
Oregon
0.023
2
Pennsylvania
-0.092
34
Rhode Island
-0.033
15
South Carolina
-0.016
9
South Dakota
-0.204
48
Tennessee
-0.194
46
Texas
-0.175
45
Utah
-0.063
24
Vermont
-0.003
4
Virginia
-0.043
17
Washington
-0.214
49
West Virginia
-0.022
11
Wisconsin
-0.032
14
Wyoming
-0.203
47
All U.S.
-0.057
Based on 2013 Who Pays data
Adjusting for Federal Offset
Suits Index
Rank
-0.169
43
-0.158
41
-0.153
40
-0.118
28
0.002
1
-0.115
26
-0.127
34
-0.040
5
-0.253
50
-0.118
27
-0.097
23
-0.038
3
-0.148
38
-0.123
33
-0.090
20
-0.122
31
-0.098
25
-0.149
39
-0.049
6
-0.070
13
-0.119
30
-0.083
16
-0.070
14
-0.123
32
-0.091
21
-0.050
7
-0.094
22
-0.193
44
-0.164
42
-0.053
8
-0.118
29
-0.084
17
-0.064
11
-0.135
37
-0.086
19
-0.130
35
-0.019
2
-0.133
36
-0.075
15
-0.054
9
-0.229
47
-0.221
46
-0.201
45
-0.097
24
-0.038
4
-0.085
18
-0.238
48
-0.057
10
-0.067
12
-0.250
49
-0.102
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